Analysis Assessing Different Options for Reducing the State’s PILT Burden, Including Proposed Sale of Public Lands and Senator McManus’s Senate Bill 521.

August 13, 2003 | Great Lakes Bulletin News Service

Assessing Different Options for Reducing the State’s PILT Burden, Including Proposed Sale of Public Lands and Senator McManus’s Senate Bill 521.

By Kyle Smiddie

Michigan Land Use Institute

Introduction to Michigan’s State-Owned Public Lands

Michigan has 4.54 million acres of state public land, more than any other state in the nation — accounting for 12.5% of the total state land area.

This land includes 3.9 million acres of state forests, 280,000 acres in 97 state parks and recreation acres, more than 300,000 acres in protected wildlife preserves, and 45,000 acres in water access sites and other land. The Department of Natural Resources is responsible for the stewardship of these public lands, a role it assumed in 1921 when the State Conservation Department was established.

Introduction to Payment In-Lieu of Taxes (PILT)

The DNR pays fees to local units of government for the land it manages within those units’ borders. These so-called “payments in-lieu of taxes,” referred to as PILT payments, come from the state’s General Fund and a variety of restricted funds, based on how the state came to own the land (See addendum at bottom). In 2002 the DNR paid nearly $16.5 million in PILT obligations. The state’s General Fund paid 70% of those monies—$11.7 million. The balance was paid by three restricted funds – the Game and Fish Protection Fund ($3.67 million), the Michigan Natural Resources Trust Fund ($829,000) and the Waterways Fund ($202,000).

PILT payments are in two categories — a fixed rate per acre, and an ad valorem rate. All of the land operating under a fixed rate is characterized by the state as “swampland.” The current fixed rate for the 3.5 million acres of swampland is $2 per acre, for a total of $7 million paid to local governments in all 83 counties. These payments come from the General Fund. Swampland consists primarily of state forestland, but also includes some park and recreation lands.

The ad valorem payments for the remaining one million acres averaged $9.23 an acre in 2002 and cost of $9.31million. The State Tax Commission establishes the ad valorum rate, which includes local millages. Of the total amount paid for ad volerem lands, $4.6 million comes from the General Fund; the balance, $4.7 million, comes from the three restricted funds. Ad valorem payments from the General Fund are almost entirely for state park land. Ad valorem payments from restricted funds are almost entirely for state wildlife preserves and forests.

The Problem

This year, as the state faced a $1.8 billion budget deficit, the DNR encountered a $1.5 million shortage in General Fund revenue for making summer 2003 PILT payments for the one million acres of ad valorem lands.

Governor Jennifer Granholm, responding to the state’s budget problems, proposed changing the formula for PILT payments by replacing the ad valorem payments for one million acres of land with a flat $2 per acre rate, producing a $5.2 million savings for the state’s General and restricted funds, but a loss of revenue for local governments.

The governor’s plan sparked a legislative debate about whether Michigan owns too much public land. A group of local government officials, conservative legislators, and an influential free market non-profit organization argued that if Michigan can’t afford its PILT payments, the state should sell the land connected to those payments.

Other officials, legislators, and non-profit organizations responded with a vigorous defense of the economic, aesthetic, and recreational value of the state’s public domain. Supporters of public land said that $1.5 million is a very small price to pay for land that generates enormous benefit to the state, and that the Legislature should continue to fund the PILT payments. They also accused critics of public lands of using the budget deficit as an excuse to add momentum to a peculiar and damaging campaign that was based solely on ideological grounds and was meant to diminish the state’s public domain. These officials and organizations are convinced that government has no proper role in owning or managing public lands, a view rejected time and again by the vast majority of state citizens.

In mid-July, the legislature allocated $1.5 million from the general fund to make the payments for this summer’s tax bill.

Civic Value of Public Land

The notion that the state owns and manages too much land is not a new one. In 1995, State Senator George McManus produced a report that argued “the state owns land that it should not own.” The basis for Mr. McManus’ conclusion came from four public meetings, in which citizens asserted that they valued public lands, but also noted that some parcels were unconnected to large forests and recreational areas and might be more difficult and expensive to manage.

Michigan’s state motto is, “If you seek a pleasant peninsula, look about you.” As Michigan’s official website recognizes, “This statement holds many truths. Michigan is a land of great splendors…full of natural beauty.”

Michigan’s ownership of 4.54 million acres of land is one of the reasons this natural beauty endures. Of the total state-owned lands, forests make up 86%, state parks, recreation areas, and wildlife areas account for 12.5%, while the remaining 1.5% is made up of water access sites and other department land. According to the DNR’s website, state public lands support 400,000 jobs and contribute over $13 billion to Michigan's economy each year.

The state forest system is the largest dedicated forest system in the nation, spanning 3.9 million acres—with three forests in the Upper Peninsula and three in the Lower Peninsula. These lands provide refuge for thousands of wildlife species that thrive in the protected, undeveloped areas. Additionally, the state forests provide tangible recreational value for outdoorsmen and women alike. Nearly one million hunters enjoy these lands each year, the most in the nation. Anglers—two million annually, ranking 4th in the US—relish state public lands that protect and foster the lakes, rivers, and streams that give life to the fish they value so. Timber, oil, natural gas, and minerals are some additional, valuable natural resources that the state’s forestlands provide.

Michigan’s 97 state parks and recreation areas are truly the crown jewels of the state’s land; they frequently set new attendance records. Annually, more than 25 million visitors enjoy the trails, beaches, and natural surroundings of these parks, which cover 280,000 acres of recreation land, 142 miles of Great Lake shoreline, and 462 miles of inland waters.

One indication of the value that people hold for public lands is the Michigan Natural Resources Trust Fund. The Trust Fund, established in 1984, is a publicly held account generated by royalties and other payments from oil and gas production on state-owned lands. Revenues from the Trust Fund are spent on purchasing new lands for outdoor recreation and protecting natural resources and open space.

Selling land as a solution means selling park land

Because of the state’s budget deficit, the General Fund currently lacks the resources to meet its annual PILT obligations. While the budget is facing a deficit, the PILT payments themselves are increasing because of the ad valorem rate. In the last five years the obligation on these lands has increased 18.1 percent, while the lands themselves increased by only 4.4 percent.

Critics of public ownership of land argue that the solution for PILT increases and the General Fund budget shortage is that the state divests itself of public land. This solution fails to see the complexity of the situation.

First, proceeds from the sale of public lands go into the Land Facilitation Fund — a fund that can only be used to purchase new lands. [1] Thus proceeds from the sale of public lands cannot currently be used to make PILT payments. [2]

Secondly, although land sale proceeds cannot be used to pay for PILT, they could relieve the DNR from some PILT obligations by reducing the amount of land the state owns. However, to address the current General Fund shortage, the state would have to directly target only the lands whose PILT obligations are paid for by the General Fund. This is because the other PILT obligations are already covered by the specialized funds connected with those lands. The obligations that need relief are for lands whose PILT obligations are paid for by the General Fund.

Thirdly, the General Fund covers all of the per-acre swampland, so selling some of it would indeed free up General Fund money, but not much, since the rate is only $2 per acre. In other words, to account for, say, the $1.5 million shortage of this summer, the state would have to sell 750,000 acres of swampland just to cover this year’s budget shortage. Because PILT payments on the ad valorem lands increase each year, the state would have to sell swampland each year to account for those increases.

Finally, selling ad valorem lands whose PILT payments are covered by the General Fund would indeed address the problem and reduce PILT obligations. However, the ad valorem lands covered by the General Fund are lands that are so valued by citizens and the state that the Legislature made specific appropriations to buy them. Our research reveals that nearly all of these lands — some 250,000 acres — are contained in state park and recreation areas. For example, the 60,000-acre Porcupine Mountains State Park, the largest state park in Michigan, contains 38,000 acres whose PILT obligations are ad valorum and met by the General Fund. [3]

Therefore, advocating selling public land as a solution to the current problem will not work, because the only way it would have a significant impact on the General Fund shortfall would be by selling highly valued land that is almost entirely within state parks and recreation areas.

Additional Options

There are other options in addition to selling the state’s valued public land. Generating additional revenues is one such option. However, these new revenues would have to increase annually, just as PILT payments do.

Another option is to somehow reduce or contain the state’s PILT obligations. State Senator Michelle McManus (R Lake Leelanau) has proposed legislation (S.B. 521) that addresses this option.

Generating Additional Revenues

User fees

One way to generate new revenue would be to increase the fees on using the state parks and recreation areas. Currently it costs $4 a day for a vehicle to enter a state park, or $20 a year if a family buys an annual pass. These fees could be increased without much controversy.

Timber

Increasing timber cuts or the fees for cutting timber in the state’s public forests could generate revenues. At the moment, no revenues from timber are used to make PILT payments. Raising the price of timber would act as an incentive for timber companies to take their business elsewhere. This option is not recommended.

Senate Bill 521Freezing PILT Obligations

PILT obligations increase annually because of the rise in local ad valorem tax rates. In the last six years the ad valorem value of state-owned lands has increased an average of $11.2 million. If this trend continues, in 2015 the taxable value of the state’s lands will be $145 million more than they were in 1996, which would have a significant impact on the state’s ad valorem-based payements.

Senator McManus’s bill would address these increases. By freezing the PILT payments at the 2003 level, the bill would assure local units of government that they would receive payments. This is extremely important because of the recent decision by state Attorney General Mike Cox local governments have no recourse if the DNR fails to meet its PILT obligations to them. The state would incur penalties, but the land would not revert back to the local units.

Some critics are concerned that this proposal does not account for inflation and precludes any further increase in PILT payments for the affected local units of government, even as the value of the state land continues to increase. However, considering the intrinsic economic and atheistic values these lands bring to citizens living in those areas, this proposal is reasonable. A cap on PILT payments would substantially aide the budgeting process on both the state and the local level. It would give the state a fixed dollar figure to use when making appropriations; currently, the DNR does not know its payments ahead of time because the ad valorem rates increase from year to year. It would also allow local units to construct their own budgets based on numbers they can clearly count on.

No New Millages

S.B. 521 also proposes that no new millages be adopted on PILT lands. Existing millages and bond issues would still continue but could not be renewed. This action would affect the local units of government that want to do specific maintenance work like on roads or street lighting, requiring that they raise their millages to cover the decrease in state funding that this would cause. This would cost residents in these areas more, but it also means that citizens living elsewhere would not be paying for services that do not benefit them directly.

Remove the DNR Lands From Paying the State Education Tax

The DNR paid $2.23 million into the State Education Tax fund in 2002. While every private property tax payer pays this tax, public lands have never sent any students to school. The bill would not necessarily reduce funding for public schools, but it would shift that funding away from publicly owned lands to other sources of the Legislature’s choosing.

Administration Reduction

S.B. 521 would streamline the more than 60,000 PILT-related, parcel-by-parcel bills the DNR receives twice a year. If the state instead received 83 bills, each listing the total county cost along with individual parcel numbers, the process would save administration costs.

Conclusion

Selling state land to relieve pressure on the state budget, particularly PILT payments, does not work because it would, over time, seriously erode the quality and quantity of the state’s land holdings, which are very valuable to the state in many different ways and enjoy strong public support. Freezing PILT payments, perhaps with some allowance for inflation, not increased land value, is the best option.

ADDENDUM

PILT Payment Source

Acquisition Funding Source for Purchased Lands

Ownership Acres 2002

PILT Payments

Waterways Fund

728.00*

$202,423.00

Public Access Sites

720.96

Harbor Development Fund

7.68

MNRTF

67,515.00*

$828,920.00

Michigan Natural Resources Trust Fund (MNRTF)

67,515.40

Game & Fish Protection Fund

695,308.00*

$3,671,220.00

State Game Fund (Deer Hunting License Fees)

486,295.58

State Game Prior to Act 325 of 1931

8,551.15

Game and Fish Fund Without Dingell-Johnson Fund (Public Fishing Sites)

18,373.98

Game Fund after Act 325, But Prior to Pittman/Robertson

1,762.36

Pittman/Robertson

177,415.61

1/12th Game & Fish 11/12th General Fund

34,923.00*

Included in Game & Fish and General Funds

1/6th Game and Fish Fund and 5/6th General Fund (Act 27 of 1944; Various State Park Acquisitions

34,923.08

General Fund

247,121.00*

$4,609,736.00

1968 Recreation Bond

438.73

Federal Land and Water Conservation Fund and Old Land Trust Fund

61,052.74

1968 Recreation Bond/Water Access Sites

1,003.32

1944 Special Appropriation for Procupine Mtn. State Park and Other Lands

[1] Land managed by the Michigan Natural Resources Trust Fund is the only land that if sold, the proceeds don’t go into the Land Facilitation Fund; instead the proceeds revert to the MNRTF. However, because this fund was designed specifically to purchase vital lands, it is reasonable to assume that these lands are not going to be sold.

[2] The Land Facilitation Fund is statutory law and could be amended so that it could make PILT payments. However then PILT payments for each year would be relying on funds generated from selling public land. This is problematic because the state would have to continually sell publicly valued lands to pay for increasing PILT payments on the ones it retains.

[3] Remaining lands are swampland (17,000 acres, paid by the General Fund) and State Game land (5,000 acres paid by the Game and Fish Protection Fund).